1. Budget Reforms, MTMF & MTBF
Md. Abdur Rahim Khan
National Consultant
(Senior Assistant Secretary)
Finance Division
28/01/2007

2. Objectives of the Session
After completion of this session participants are expected to
Be familiar with the weaknesses of present budgeting;
Reforms in Budgeting
Medium Term Macroeconomic Framework
Medium Term Budget Framework
Process and steps of MTBF

3. National Budget Objectives
The objectives of The Budget can be broadly categorised as follows:
Maintain macro-economic stability
Reduce poverty
Foster sustainable growth
Carry on economic and structural reforms, economic liberalization, human resource development and good governance

4. Weaknesses of Budgeting
Incremental;
Missing link between Rev. & Dev. Budget;
Centralized or top-down approach;
Bureaucratic not demand driven;
Expenditure driven not strategic;
Lack of performance measurement to ensure VFM;
Not realistic.

5. Need for Reform: Future Direction
From incremental approach to performance-orientated budgeting.
Introduction of a Medium-Term Budgetary Framework (MTBF) based on Medium-term Macroeconomic Framework (MTMF).
Integration of non-development and development budget.
Maintaining sustainable budget deficits.

6. Need for Reform: Future Direction-How
Augmentation of more domestic resource particularly through widening VAT and Income Tax net.
Further augmentation of non-tax revenue.
Further expenditure rationalization through prioritization.
Resorting to more concessional borrowing for financing budget deficits.

7. Need for Reform: Future Direction-How (Contd..)
Value for money/performance orientation in statutory audit.
Ex post evaluation and tracking surveys to measure performance and impact.
Enactment of public money and budget management law

8. Medium Term Macroeconomic Framework (MTMF)
MTMF is done by Financial programming in the context of a macroeconomic framework involving the accounts of the key sectors:
Real sector (national accounts)
External sector (balance of payments)
Fiscal Sector (general or central government)
Monetary sector (monetary authorities)

9. Financial Programming: Definition
A financial program is a comprehensive set of coordinated policy measures aimed at achieving a set of economic objectives
Building blocks of financial programs are—
(a) objectives (b) policy measures (c) forecasting
-- these are interrelated
A financial program is typically developed in comparison with a baseline scenario for an economy to construct the macro framework

10. Preparation of MTMF
Projections and Forecast of National Accounts, Balance of Payments, Fiscal Account and Monetary sector
Aggregate Projections is Supported by Detailed Projections
Fiscal Forecast Includes:
-Revenue Forecasts
-Overall Expenditure Framework
-Forecast of Financing Requirements/Availability
-Debt Servicing Projections
-Projection of Discretionary Spending

11. Interrelationships among Macroeconomic Accounts
Government
Revenues
Grants
Expenditures
Current
Capital
Financing
Domestic Financing
Banking Sector
Non-Bank Sector
External Financing
National Accounts
Private Consumption
Public Sector Consumption
Private Investment
Public Sector Investment
Exports of goods and non-factor services
Imports of goods and non-factor services
GDP
GNDI
Current Account
Exports
Imports
services
Transfers
Capital and Financial Account
Direct Investment
Medium/Long-Term Capital
Short-Term Capital
Deficit or Surplus:
Change in International Reserves
Deposit Money Banks
Net Foreign Assets
Bank’s Reserves
Net Domestic Assets
Credit to Public Sector
Credit to Private Sector
Other Assets
Net Foreign Liabilities
Liabilities with monetary authorities
Liabilities with the private sector
Monetary Authorities
Net International Reserves
Net Domestic Assets
Credit to Public Sector
Credit to Banks
Other Assets
Net Foreign Liabilities
Reserve Money

12. Interrelationships among Macroeconomic Accounts
National Accounts
Private Consumption
Public Sector Consumption
Private Investment
Public Sector Investment
Exports of goods and non-factor services
Imports of goods and non-factor services
GDP
GNDI
Government
Revenues
Grants
Expenditures
Current
Capital
Financing
Domestic Financing
Banking Sector
Non-Bank Sector
External Financing
Current Account
Exports
Imports
services
Transfers
Capital and Financial Account
Direct Investment
Medium/Long-Term Capital
Short-Term Capital
Deficit or Surplus:
Change in International Reserves
Deposit Money banks
Net Foreign Assets
Bank’s Reserves
Net Domestic Assets
Credit to Public Sector
Credit to Private Sector
Other Assets
Net Foreign Liabilities
Liabilities with monetary authorities
Liabilities with the private sector
Monetary Authorities
Net International Reserves
Credit to Banks
Reserve Money

13. Steps in MTMF: Basic Approach
Prepare baseline scenario to identify main
problems, causes, and policy areas for reform
Set objectives and targets
Establish initial policy package
Make consistent sectoral forecasts to see if
objectives are achieved. If not, change policies
or objectives.
Keep iterating until objectives are achieved.

14. Objectives of MTMF Aggregate Revenue & Expenditure
Ministry/Division wise Income-Expenditure Ceiling
Formulate Medium Term Expenditure Plan
Role out Medium Term Budget Framework (MTBF)
Sustainable Budget Deficit

15. Evolution of the MTBF Concept
Introduced in some of the high income countries in the late 1970s and 1980s
Budget planning tented to be incremental and short-term with little attention given to the effectiveness and efficiency of public spending programs (Australia, New Zealand and the UK were among early reformers.)
From mid 1990s World Bank started promoting the introduction of MTBFs in developing and transitional countries
Key concern in these countries were to achieve greater realism in budget planning and to strengthen the linkages between government policies and strategies and budget resource allocations

16. What is Medium Term Budgetary Framework (MTBF)?
Medium Term Budgetary Framework (MTBF) is a multi-year approach to budgeting that provides a medium term framework for government receipts and expenditure.
MTBF links the spending plans of government to its policy objectives and requires a credible estimate of resources available for expenditure.

17. What is MTBF? (Contd.)
MTBF requires decision makers to balance what is affordable in aggregate against the policy priority of the country.
MTBF consists of a top-down resource envelop, a bottom-up estimation of the current and medium term cost of existing policy and, ultimately the matching of these costs with available resources.

18. MTBF The Main Features
A medium term outlook to budget planning – 5 years
Linking policy priorities to resource allocations – Vision 2021/NSAPR to budget
Emphasizing the efficient use of limited public resources 18

19. Objectives of the MTBF
improving macroeconomic stability by matching expenditure and resources as projected in the Medium Term Macroeconomic Framework (MTMF)
ensuring stability in budgetary management in the short-term, keeping the public expenditure within a sustainable limit in the medium and long term and accelerating pro-poor economic growth at the same time
enhancing the participation and role of the line ministries in the budget preparation process
improving predictability of policy as well as funding by providing a medium term view of policy objectives and resource availability, so that line ministries can prepare plan for forward expenditure

20. Objectives of the MTBF (Contd.)
allocating resources between and within sectors/ministries according to the strategic priorities
ensuring proper, efficient and effective use of resources by establishing a more explicit linkage between the PRSP and other policy documents and line ministries’ objectives, policies and resource allocation
removing the demarcation between the development and non-development budget gradually by joint programming of development and non-development spending
establishing a system for measurement of performance of ministries/divisions and subordinate offices, so that a clear indication of the desired output from the inputs provided through the budget can be shown.

21. Differences Between Traditional & MTBF
Traditional Budgeting
MTBF
Prepared for 1 year
For 3-5 Years with 1 Year Actual & 4 years Projections
Divided into 2Segments-Non-dev & Dev
No Separation between Non-dev & Dev
Incremental
Focus on Strategic Objectives to Link Activities/Programs
Expenditure Driven-No Question for Output/Performance
Performance Oriented and Establish linkage between SO & Activities

22. Differences Between Traditional & MTBF
Traditional Budgeting
MTBF
FD Plays deciding Role
Ensure participation of the Line Ministry/Divisions
Chance for Duplication of Expenditure line
No Chance for Duplication of Expenditure Line
No Realistic Projection for Revenue receipts
Realistic Revenue Projection under MTMF
Priority Depends on Political Will
Priority Determined by the PRSP/Policy Document

23. Success Achieved: MTBF Approach
Macro economic
forecasting
PRIORITIES
NSAPR/National
Policy Documents
RESOURCES
ACTIVITIES
OUTPUTS
OUTCOMES
Ministry Objectives 23

24. Success Achieved: MTBF Approach (Cont.)
Strategic phase
Resource Allocation phase
Budget Call Circular I
Issued October
Budget Call Circular II
Issued March 24

25. Strategic Phase Provide a direction for the ministry
Inject a sense of purpose into the ministries activities
Decide WHO we are, WHAT we do, and WHERE we are going (3 W!!!)
Provide a 1+4 year projection of total aggregate budget allocation – development and non-development 25

26. The Strategic Phase (Contd.)
Budget Call Circular I – Ministry Budget Framework (MBF) - Contents:
Mission Statement to reflect the management’s vision of what the ministry seeks to do and become
The medium term strategic objectives
The key activities
Key performance indicators
Targets against which performance can be measured
Prioritisation of the use of resources
Assess the poverty and gender impact of the strategies
Initial allocation of aggregate development and non-development resources for 3 years 26

27. Detailed Resource Allocation Phase
Budget Call Circular II
The MBF (BCCI) will be evaluated by FD and PC. Based on this evaluation, and considering any changes in macro economic trends the ministry resources ceilings may be slightly revised
Within the revised ceiling the ministry must undertake a detailed allocation of resources
The resources are applied to achieve the targets and KPIs contained in the MBF 27

28. MTBF Budget preparation process
Develop Objectives, strategies and targets
Annual Budget
Outer year forecasts
Update Objectives, strategies and targets
Annual Budget
Outer year forecasts

29. Stages involved in MTBF
Preparation of Macroeconomic and Fiscal Framework
Line Ministry Statement of Strategic Spending Priorities
Expenditure Review and Setting Resource Ceiling
Preparation of Budget Circular
Preparation of Departmental Estimates
Review/Finalization of Estimates by the Respective Ministry
Review of Proposed Estimates by FD and PC and Discussion with Line Ministries
Compilation and Finalization of Budget/MTBF
Presentation of Budget/MTBF to Parliament

30. Outcome of this Session
Weaknesses of existing budget process
Reforms in financial Management
MTMF
MTBF
Differences Between Traditional Budgeting System & MTBF
Procedure – Stages Involved in MTBF

31. Let’s think in our next session
Is It A ‘Good’ Budget
Five Questions
Let’s think in our next session

32. Thank you
Any Question